Is Due Diligence Important For A Business Purchase?   by Ray Latimer

in Law / Intellectual Property    (submitted 2011-09-22)

If you are considering buying or selling a company then due diligence ought to be section of your process and there can be a variety of areas you might want to think of.

Why Due Diligence Is Necessary?

Due diligence is essential because it allows one to develop a very subjective conclusion and to analyze the facts as is. This is sometimes a lot easier suggested than executed, and the amount of work invested in due diligence has to link directly into the reasons you are buying an enterprise and whatever you see as the key risks, looking at that if it is strange, it is a risk.

To be a purchaser or investor thinking of buying an enterprise, you are eligible to see all financials and research that is highly relevant to the transaction of the enterprise. Here are a few guidelines one can stick to to guarantee the right information is supplied and that it can meet a minimum standard to allow you to make the final decision. In the end of the due diligence method, you have to know about the complete economic health of the business enterprise, its prospects, opponents and the market.

The Due Diligence Guidelines

Here are a list of items to address and they are not in any exact order. These are simply recommendations to comply with and you might ask for more details with respect to the form of small business.

1. Arrange a strategy for Due Diligence - it means that each party have to choose what matters and data will will need to be provided to permit for a due diligence to be accomplished. This can include and not limited by organisational structures, shareholdings, annual statutory reporting, staff, legal and related groups, and company financial records.

2. Test financials statements - it's important to review the profit and loss statements, balance sheets, annual reports and then for any cashflow statements. Validate all documents with an accountant and the tax office to ensure it complements and is correct.

3. Check out tax documents - For Australian companies, it's beneficial to examine the income tax returns for the past three years and to examine every company activity statement (BAS). In addition make sure their tax documents balance out with the profit and loss statements and see that all proper taxes have been paid, including payroll tax, stamp duties and GST.

4. Check assets - investigate plant and equipment if there are any, guaranteeing they're in good functioning structure. Do a stock valuation on the level of stock as at the agreement date. It is also smart to test insurance data to see if their are protected until agreement.

5. Study the range of the customers and providers - ask to check the list of key customers and know if they are active buyers. Check out if there are existing contracts and if they are to bring in future business enterprise. On the other hand, examine their providers and see if there are any outstanding payments and invoices on arrangement. Verify to see if there are any unpredicted costs that may occur after you purchase the organization.

6. Determine why the owner is selling - investigate why the business is being distributed and find out how long the owner has been in enterprise. Ask the attendees and dealers as they can provide important information about the business as well.

7. Verify the opponents - Look at the rivalry to see if they may impact the company when you take control. Discover any potential risks and examine industry trends.

8. Investigate legal rights - examine any government restrictions that may impact the business enterprise. Seek guidance from a professional lawyer who can supply more details about the legal aspects that would change the organization.

9. Come to an agreement on a time frame to perform the due diligence - there should really be a set deadline for the due diligence to be completed which enables you to lessen the expenses and influence on the enterprise. Generally it should take not more than 20 days.

10. Sign Non-disclosure Agreements (NDA's) involving each party - for any parties involved, whether it be an accountant, lawyer or a consultant, it is beneficial to have them sign a NDA to protect you and the companies intellectual property whilst completing a due diligence.

In order to make the system consistent and effective, look into accumulating the above documents and data in an online storage facility. This makes it easy to find and access in the future. You may look into storing this on Dropbox or Google Docs. You can then grant certain people access to some or all of the data and track their activities. You should definitely number and name each record in a coordinated way to help you find it and refer to it.

It's highly recommended to preserve the due diligence data as it can be employed in the future. If you want more data that may help you have a conclusion to obtain a business, look into reading our due diligence manual on our website.

About the Author

Finding a way to choose and get due diligence completed can be a challenge. Learn more about due diligence for businesses through our various range of articles that Ray Latimer has provided on his website.